August 7, 2018

Are the terms of a contract ever fixed?

Here is a common scenario experienced by litigation solicitors. A manufacturer and a supplier enter into a contract. The parties record the terms of their agreement in writing. Time moves on. As the business relationship develops, the parties alter the way in which they deal with each other - often payments are made late or the place of delivery changes. The parties do not discuss this variation; however, their conduct suggests that they both accept it. Then, for one reason or another, one of the parties wishes to revert to the original trading terms. The following question then arises: are the original terms of the contract still enforceable or have those terms been varied by the conduct of the parties?

Methods of varying a contract

A key principle of contract law in England and Wales is that the parties have the freedom to vary the terms of a contract by agreement as long as some “consideration” (some form of value) passes between the parties and the necessary formalities of the contract have been complied with.

The agreement to vary the terms can be made orally, in writing or by the conduct of the parties (as in the scenario above).

Clauses aimed at preventing variation

Commonly, commercial contracts include clauses which provide (i) that any variation to its terms must be agreed in writing and (ii) that a party shall not be deemed to have waived its contractual rights simply because it delayed in asserting those rights. The purpose of these clauses is to try to protect a party’s position so that it is able to argue that the original contractual terms remain enforceable no matter what that party has done contrary to those terms.

So, how effective are these clauses? As is so often the case in litigation, the answer is “it depends”. As stated above, the parties to a contract have the freedom to vary the terms of a contract. This freedom extends to terms which are designed to prevent the variation of a contract. In other words, in the right circumstances, a term preventing variation of a contract can itself be varied by the parties’ conduct. Whether the contract is actually found to have been varied will depend upon the specific circumstances of the case, and the judge who is deciding the case.

There is a long line of caselaw on this issue – one of the most recent cases being the Court of Appeal case of MWB Business Exchange Centres Limited v. Rock Advertising Limited [2016] EWCA Civ 553. In that case, it was determined that a party which wishes to rely upon a variation of contract must be able to show clear, unequivocal conduct as evidence that the parties agreed to the variation.

Conclusion

While a party wishing to rely upon the original terms of a contract cannot completely prevent the risk of variation by conduct, that party can take steps to reduce the risk:

  1. ensure that the written terms of the contract are drafted as clearly as possible so as to avoid any misunderstanding between the parties about their respective rights and responsibilities;
  2. periodically take stock of whether the contract is being performed in line with its written terms; and
  3. if there has been deviation from the written terms, contact the other party and insist upon compliance with the original terms (alternatively, if the variation is favourable, consider agreeing a written variation of the contract to ensure that each side is clear about its new rights and responsibilities).

If you require tailored advice in respect of variation of contract, contact Holmes & Hills’ team of specialist manufacturing lawyers.

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